The Evidence-Based Investor

You couldn’t make this up

Posted by Robin Powell on June 22, 2017

I thought I was reaching the stage where nothing I read about the asset management shocked me any more. But then I came across a piece in the FT that’s so extraordinary I can scarcely believe it.

Union Asset Management, Germany’s third-largest asset manager, is apparently about to axe more than 100 external research providers. The move is in response to the new Europe-wide MiFID II regulations, which are due to come into force in January, and will require fund companies to explain to consumers for the first time how much extra they pay for research.

This, of course, is a good thing. I have written before about the scandalous opacity surrounding the cost of research, how dubious the quality of the research often is, and yet how large swathes of it go completely unread. In almost all cases, it’s not the fund manager but the end investor who foots the bill, and yet it’s almost impossible to work out the exact amount you pay because it’s usually bundled into the dealing commissions that brokers get when asset managers decide to buy or sell shares. The costs of these dealing commissions are paid by funds, not fund managers. In other words, they are a hidden cost on consumers, over and above the annual management charge.

So no, it’s not the fact that firms like Union are cutting back on their research spend that surprises me. What I found so shocking was the revelation by Alexander Schindler, a member of Union’s executive board, that the company itself has little clue either about how much it spends. “Until now,” he admitted to the FT, “we have never really quantified the cost.”

It gets worse. As well as being  a senior executive at Union (which, by the way, manages €310 billion in assets), Herr Schindler is also president of Efama, the European association for fund managers. Along with Britain’s Investment Association, Efama is one one of the industry trade bodies that has vociferously lobbied against (or at least attempted to water down) reforms designed to protect consumers.

That the man who effectively heads the European fund industry doesn’t know (and that he and his colleagues have not before now attempted to calculate) what his own firm spends on research is, frankly, mind-blowing.

And one more thing. If you read the FT article carefully, you’ll see that Schindler gives away the fact that many fund managers only care about the cost and quality of research when either:

  1. they have to pay for it themselves; or
  2. it’s transparent to customers how much they have to pay for it over and above the annual management charge.

He also predicts that forcing fund managers to be more disciplined in their research spending will lead to a 30% fall in trading costs (a reduction, by the way, that Schindler says he doesn’t expect Union will pass on to its customers).

So, either Union was happily wasting that much money before, or it knowingly plans to do a worse job in the future if the other choices are to pay for it themselves or be transparent to clients about the full costs they are bearing.

Either way, isn’t it funny how stock research is suddenly no longer so vital now that fund managers are obliged to pick up the tab?

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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector. Regis Media.

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